What India VIX's jump to 24 level means for the markets

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The India VIX has been the talk of the town as it jumped by over 91% in May 2024 ahead of India’s election results scheduled next week. Notably, this is the second-highest monthly jump since March 2020.

Despite recognizing the importance of tracking the India VIX, many people struggle to understand what an India VIX value of 24 actually means. If the current India VIX reading is 24, it indicates that the Nifty 50 is expected to fluctuate within a 24% range, either up or down, over a year.

To calculate the monthly range, divide the yearly range by the square root of 12 (the number of months in a year), which results in approximately 6.93%. This means the monthly range for the India VIX is 6.93% up or down. Similarly, we can calculate the expected weekly and daily fluctuation ranges for the Nifty 50.

The below table shows the expected fluctuation range for the Nifty 50 when the India VIX is 24.

Yearly Range	24.00%
Monthly Range	6.93%
Weekly Range	3.33%
Daily Range	1.52%

Understanding the relationship between the India VIX and various sectoral indices is crucial for investors. By examining how different sectors perform during periods of high volatility, investors can make more informed decisions, and manage risks effectively.

The following chart shows that India's VIX has surged by over 30% in a month 12 times in the last 10 years.

ETMarkets.com

The data below presents the average volatility, average returns, average 1-week forward returns, and average 2-week forward returns for various sectoral indices when the India VIX has surged by more than 30% in a single month from April 01, 2013 to May 31, 2024.

Average 1 Week & 2 Week Forward % Returns after a 30% Spike in India VIX

Index	Average Volatility	Average Returns	Average 1-Week Forward Returns (%)	Average 2-Weeks Forward Returns (%)
Nifty 50	1.77%	-3.31%	-1.3%	0.0%
Bank Nifty	2.12%	-3.87%	-1.8%	0.0%
Nifty Auto	1.98%	-4.32%	-2.4%	-0.7%
Nifty IT	2.10%	-2.52%	-0.1%	-0.7%
Nifty FMCG	1.93%	-2.12%	-0.8%	-0.1%
Nifty Media	2.30%	-6.55%	-2.1%	-0.6%
Nifty Metal	3.55%	-3.01%	1.1%	2.1%
Nifty Realty	3.28%	-4.59%	-2.1%	-0.9%
Nifty PSU Bank	3.20%	-5.27%	-3.0%	-1.4%
Nifty PSE	2.56%	-2.96%	-0.6%	0.3%
Nifty Energy	2.42%	-2.39%	-0.9%	-0.2%
Nifty Pharma	2.26%	-1.16%	0.8%	2.2%

From the table above, we can infer the following key points:

1. The Nifty Metal index showed the highest average volatility at 3.55%, followed by the Nifty PSU Bank and Nifty Realty indices. In contrast, the defensive Nifty FMCG index exhibited the lowest average volatility at 1.93%.

• The data indicates that whenever the India VIX surged by over 30%, all major sectoral indices experienced negative average returns. Nifty Pharma and Nifty FMCG suffered the least declines, showcasing their defensive characteristics during volatile periods.

• The average 1-week forward returns post a VIX surge were generally negative for most indices, with the Nifty Auto, Nifty Realty, and Nifty Media indices experiencing the largest declines. However, the Nifty Metal index displayed a positive return of 1.1%, indicating a potential recovery or investor optimism in this sector following the initial panic.

When we have a look at the average 2-week forward returns, the Nifty Metal and Nifty Pharma indices showed positive returns at 2.1% and 2.2%, respectively. Except for Nifty Realty and Nifty PSU, other indices start recovering some of the losses.

• Adjusting exposure by reducing investments in sectors sensitive to VIX fluctuations and increasing allocations to defensive sectors such as FMCG and Pharma during periods of increased volatility can serve as a strategic hedge for the portfolio, potentially minimizing downside risk.

• Volatility spikes often result in sharp sell-offs, creating attractive entry points for opportunistic investors. The Metals sector attempts to revert to the mean after a sharp fall, and the Pharma sector, which provides essential healthcare products, is less susceptible to economic downturns. These sectors offer attractive buying opportunities following volatility spikes, as they have shown favorable average 1-week and 2-week forward returns.

Thus, India VIX has become a vital tool for investors in the face of growing market uncertainties. If used tactfully, India VIX can act as a barometer to gauge market sentiment and implement effective risk management thereby navigating the complexities of today's financial markets more adeptly.

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